This article is part of our passive investors guide on real estate syndications, available here.
If you’ve looked into investing in syndicated real estate deals or crowdfunding deals, you’ve likely been asked or heard of the terms Accredited Investor, Non-Accredited Investor, or even Sophisticated Investor.
The SEC has established these criteria for classifying each sort of possible private investor. What bucket you’re placed in will determine which investment options are available to you. Also, on a side note, if you’re able to qualify for real estate professional status, you’ll be able to further benefit by carrying passive losses towards your active income.
Accredited Investor Net Worth
An accredited investor is an individual who meets the guidelines and requirements of income and net worth based on the Securities and Exchange Commission (SEC) regulations. This is so that the SEC can ensure proper protection for all investors. To be an accredited investor, you must satisfy at least one of the following:
1️⃣ Have an annual income of $200,000, or $300,000 for joint income, for each of the last two years, with expectations of earning the same or higher income this year.
2️⃣ Have a net worth exceeding $1 million, not counting your primary home.
Sophisticated Investor vs Accredited Investor
A sophisticated investor is an individual who is non-accredited but has enough knowledge and experience in business matters to evaluate the risks and merits of an investment but doesn’t meet the financial requirements of an Accredited Investor. The accredited investor vs sophisticated investor is differentiated by satisfying those net worth and income requirements. But it’s important to note that this doesn’t mean they are less knowledgeable than accredited investors.
Becoming an accredited investor is a long process that usually takes years to achieve, but it can be done with hard work. It’s important to remember that just because you meet the financial requirements doesn’t mean you are automatically accredited. Other factors come into play, such as your knowledge and experience in the investment field.
If you feel like you meet the requirements of a sophisticated investor, but don’t quite meet those of accredited investors, don’t worry. There are ways to become accredited, even if you don’t have the net worth or income required. The important thing is to keep learning and expanding your knowledge to make sound investment decisions.
Non Accredited Investor Definition
So now that you understand what an Accredited Investor and a Sophisticated Investor are, you’re probably wondering what makes you a Non-Accredited Investor. Well, it’s pretty simple, an individual who also may not meet the Accredited financial requirements but doesn’t necessarily have any experience in investing. The SEC classifies these types of investors as Non-Accredited to protect the average person from investing in something without fully knowing its risks. The SEC believes that if you exceed a certain annual income threshold or net worth, you are well-established and financially educated enough to make an informed decision and assume the risks based on your financial acumen.
If you’re considered a Non-Accredited Investor, it’s likely that you won’t have the same opportunities as an Accredited Investor to participate in investment vehicles offered by most private equity, hedge funds, or angel investing opportunities.
It’s important to note that being non-accredited doesn’t mean you can’t jump into investments. There are plenty of options for everyone, whether they are accredited investors or not. However, it’s always wise to learn as much as possible about investments before making any type of decision involving them.
Accredited Investor Definition 2023
The SEC has received a lot of pushback on these definitions as they further create a wealth gap between investment opportunities afforded to only high-earning individuals. The goal of the SEC is to protect the average investor, but at the same time, it’s also denying them access. Some say it may make more sense to have some test that gauges the level of sophistication of an investor instead of it solely being a wealth test.
But the SEC will review these definitions every four years to ensure they help achieve their number one goal. Of course, this is to protect investors and ensure compliance is being met across the board from those who are actually issuing the security (providing the investment opportunity).
Accredited vs Non Accredited Investor
There are a few differences between accredited and non-accredited investors and they are as follows:
- Satisfying of SEC Requirments: The difference between being classified as accredited or non-accredited is simply the satisfying of SEC income and net worth requirements.
- Investment Minimums: Minimum investment amounts can vary depending on whether the investment opportunity takes on capital from accredited or non-accredited investors.
- Investment Opportunities: Accredited investors have access to more opportunities and sometimes better opportunities. This is due to most real estate sponsors not wanting to be limited in their capital-raising abilities, which depending on the opportunity pushes them to raise capital exclusively from accredited investors.
Real Estate Syndication Defined
A real estate syndication is a successful technique for investors to combine their resources to acquire more considerable real estate assets that they would otherwise be unable to manage or afford as an individual investor. We generally utilize and raise extra funds from outside investors to acquire it to force appreciation and then actively manage the asset.
Typically 25%-30% of the funds are pooled together from the syndicator and the passive investors, and the other 70%-75% of the funds come from the lender/bank. A real estate syndication entails many people and organizations, including CPAs, lenders, real estate brokers, attorneys, property managers, passive investors (you), and the syndicator who puts the whole arrangement together and manages the asset (Willowdale Equity).
A real estate syndication can be a great way to get into real estate as an investor, but there are some things you should keep in mind, like what type of markets you’ll be investing in. First and foremost, always do your due diligence on the syndicator and ensure they’re someone you can trust. Secondly, ensure you understand how the investment works and the risks and rewards. Lastly, be prepared to lose some or all of your investment if things don’t go as planned.
Related Read: The Real Estate Syndication Fees You Should Know About
Two Offering Types You Will See as a Passive Investor
Real estate syndicators/deal sponsors must ask qualifying questions to comply with the SEC. But depending on how much money the deal sponsor is looking to raise and many other factors, it will dictate what type of investment “offering” will be made to potential investors. Each type of offering will have constraints and requirements for the capital raiser.
Real estate syndication investment opportunities are presented to passive investors as an “Offering.” The two most common types of offerings you will see are Rule 506 (b) or (c) of Regulation D, two distinct exemptions from registration for companies when they offer and sell securities.
Reg. D; 506 (b)
The company may collect money from an unlimited number of “accredited investors” and up to 35 “sophisticated investors”
Reg. D; 506 (c)
The investors in the offering are all “accredited investors,”; and the company takes reasonable steps to verify that the investors are “accredited investors.”
Accredited Investor Verification
Verifying an investor’s Accreditation status, as required in a 506 (c) raise, is crucial for SEC compliance. The real estate syndicator/sponsor would need the proper accreditation letter or a CPA to verify it. But thanks to the democratization of capital raising, sites like verifyinvestor.com have emerged that allow individuals to get their Accredited Investor status verified by a 3rd party company all online.
Amendments to the Accredited Investor Definition by the Securities and Exchange Commission (SEC)
As of December 9th, 2020, the Securities and Exchange Commission (SEC) has updated the definition of an accredited investor. The update goes above and beyond the income and net worth thresholds to include specific professional knowledge, experience, and certification measures.
This amendment allows accredited investors, based on their ability to demonstrate a certain level of financial sophistication, to gain accredited investor status and access private equity investment opportunities that they would historically not be privy to—giving more investors the ability to take their investment funds and place them in a private fund or certain types of hedge funds if they meet the fund managers’ internal sophistication requirements.
This will level the playing field for investors as it will open up institutional quality investment offerings to a broader group of people so they, too, can become equity owners.
Related Read: How to Prove You Are An Accredited Investor
Accredited Investor Groups
These groups are generally private and not always easily searchable. Many of these accredited investor groups are invite-only, so you would have to know someone or the group admin would have to know you. Here at Willowdale Equity, we have a private real estate investment group for select investors. Members get access to exclusive resources and our private multifamily investment opportunities.
Frequently Asked Questions About How To Become An Accredited Investor
There are several methods to get your accredited investor status verified. Most methods are free but may require pulling some teeth from your CPA. The method that requires you to pay would be proving your accreditation through a self-accreditation site. This is where you provide the website with the documents they request, and they confirm whether or not you are accredited.
Investors should be accredited if they are looking to grow their investment portfolio. Most institutions or private equity companies require their investors to be accredited. This is due to compliance rules to protect smaller investors set out by the securities and exchange commission (SEC).
There are two main ways to prove that you an accredited investor. The first way is the (1) Income method, which can be proven through tax filings or pay stubs, a letter from a CPA confirming your actual and expected annual income, or various IRS tax forms that report income. The second way is the (2) Net Worth method. This would include providing all your assets and liabilities, which can be accomplished through various IRS forms, the value of securities held, consumer credit reports, deeds and evidence of real estate holdings, and a few others.
Accredited vs Non Accredited Investor - Conclusion
If you’re not yet an accredited investor and you’re just starting your investing journey at the very bottom as a Non-Accredited investor, remember that’s okay and that you have to start somewhere. Yes, you won’t have access to the best investment opportunities out of the gate, but as you slowly begin to invest and transition into a Sophisticated investor, you’re two-thirds of the way there.
A word of caution, always do your research on any investment you are thinking of making, accredited or not. The market is ever-changing, and things can go up and down very quickly, so you must have a firm understanding of what you’re investing in before taking the plunge.
- Investopedia, “Crowdfunding for Non-Accredited Investors“
- HUFFPost, “The Six Things Non-Accredited Investors Need to Know About Title 111 of the JOBS Act“
- Investor.GOV, “Accredited Investors“
- SEC.GOV, “Amendments to Accredited Investor Definition“
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